Ledes from the Land of Enchantment

Tax advice can be ‘acceptable,’ but maybe not ‘right’

There is a drug commercial that ended with advice to check with your rheumatologist.

People are also commonly advised to check with their attorney.

You are more likely to have an attorney than a rheumatologist. There are 1.3 million attorneys in the US but only 5,595 rheumatologists.

This means most of you would not know how to check with “your” rheumatologist. Like me, you might even have to look up the spelling before you tried to engage “your” rheumatologist.

But this column is not about rheumatologists, even if I do like to practice using the word.

It is about tax advisers, broadly defined.

Being broad allows me to sweep in CPAs, attorneys, enrolled agents and “commercial” return preparers.

This column asks what you might do if someone advised you to check with your CPA. Or even just to check with your tax adviser.

There are about 465,000 people practicing as CPAs. So you are more likely to have a CPA than a rheumatologist, but less likely than having an attorney.

But most of you are on your own. Nonetheless, I sometimes advise people who send me questions for the column to talk to “your” CPA for more specifics.

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What do you do when she (about 56% of the 465,000 are women) is not available, perhaps because you never hired her?

The “old” answer was to call the IRS. Most people just want to get their return right, and to them that means reporting the way the IRS “allows.”

If the IRS hires 85,000 new people over the next 10 years, and loses the expected 47,000 retirements, some of the net gain will go to answering taxpayer questions.

A former National Taxpayer Advocate and a former IRS Commissioner both believe that the vast majority of people want to get their return right. They just don’t have the answers they need.

IRS has increasingly turned to FAQs on a website as staffing shortages reduce phone contacts. Most tax issues are fact-specific.

You really need someone to hear your facts and perhaps even ask for clarification. If you have no CPA, and no one is home at the IRS, tax filings can increase antacid sales. Your rheumatologist can’t help with this anxiety.

What motivated this column was an actual question. It asked, “I have an LLC that I use to operate a business where I install and repair gutters. Do I have to pay self-employment (SE) tax?”

The better way to phrase this question is, how much of my income is subject to SE tax? The answer might be all of it. The answer may also be some, but not all, of it.

The SE tax can be as high as 15.3% of income. That’s in addition to federal and state income tax, and state gross receipts tax.

So what is the right answer about this SE tax? I don’t know and no one else can tell you. But something has to be reported on the tax return.

A CPA cannot advise someone to take a tax position, or sign a tax return, unless each position has at least a 40-45% chance of success if challenged. This is called “substantial authority.”

Most people assume there is a “right” answer. One that is 100% certain. Other answers are then 0% likely to succeed.

This is not so. Instead of “right,” it may be more accurate to say “acceptable.” And acceptable would be defined as an answer that has a 40-45% chance of success if challenged.

My wife immediately understood this distinction when I ran this column by her. She said, “I knew you were not Mr. Right, but you seemed to be Mr. Acceptable.” I said yes, you’ve got it!

Specific facts determine what is acceptable (or not). I could have answered the SE question in this column. But it would have been a lot of, it depends.

You need a CPA or other quality tax adviser to explain the issues and possible outcomes. But most of you don’t have a CPA or other quality tax adviser.

If your problem is SE tax, get a quality tax adviser. If you’re the “normal” person with less challenging questions, pray for new IRS resources directed to in-person contacts.

James R. Hamill is the director of tax practice at Reynolds, Hix & Co. He can be reached at [email protected].

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